Sea Limited soars 45% this year as it turns profitable. Here's what investors should know.

What happened?

Sea Limited released its fourth quarter 2023 (4Q 2023) and full-year results earlier this week.

It was an impressive set of numbers that sparked a mini-rally in the shares of the e-commerce and gaming player.

To date, shares of Sea Limited have soared 45% and are 62% higher than the 52-week low of US$34.35 (see below).

This is a sharp reversal from the situation just four months ago shares of the company plunged by 22% in a single day after it reported a quarterly loss for its third quarter.

Could Sea Limited’s share price continue rising as optimism builds?

We dig deeper into the company’s latest financial numbers and operating statistics to gain a clearer picture.

What investors may like about Sea Limited’s earnings

#1 – First-ever full-year profit

First off, the company reported its first-ever full year of profitability.

Revenue rose 4.9% year on year to US$13.1 billion with the DE division seeing a year-on-year revenue decline offset by a better year-on-year revenue performance from the e-commerce division.

Sea Limited managed to reduce its selling and marketing expenses by 15% year on year and general and administrative expenses by 21% year on year.

These reductions, along with a lower level of goodwill impairment, helped the business to generate an operating profit of US$224.8 million for the year.

Net profit for 2023 came in at US$150.7 million, partially aided by a year-on-year doubling of interest income to US$331.3 million.

Capital expenditure also fell sharply year on year from US$924.2 million in 2022 to just US$242 million last year.

As a result, the company generated a positive free cash flow of US$1.84 billion for 2023, reversing the free cash outflow in the prior year.

#2 – Reinvigorated growth at Shopee

Over at Shopee, growth seems to have returned with a bang.

Gross orders jumped 46% year on year to 2.5 billion for 4Q 2023 while gross merchandise value (GMV) climbed 29% year on year to US$23.1 billion.

This performance was significantly better than the 5% year-on-year increase in GMV back in 3Q 2023.

The division also significantly reduced its operating loss from US$2 billion in 2022 to US$550.5 million in 2023.

#3 – SeaMoney turns profitable

Sea Limited’s third division, Digital Financial Services represented by SeaMoney, also pulled in an admirable performance.

Revenue continued to rise, hitting US$472.4 million in 4Q 2023, up 24% year on year.

The division continued to build up its loan book with consumer and SME loans rising 27% year on year to US$3.1 billion.

The non-performing loans ratio for SeaMoney’s loan book stood at 1.6%, unchanged quarter-on-quarter.

The Digital Finance Services division turned in an operating profit of US$490.2 million for 2023, reversing the operating loss of US$277.3 million in the previous year.

#4 – Positive guidance provided for 2024

CEO Forrest Li sounded an optimistic tone for this year and expects 2024 to be another profitable year for Sea Limited.

Shopee has also solidified its market share within the region and the company intends to defend this market share.

2024’s GMV is expected to grow by a high-teens percentage year on year.

Free Fire, Garena’s most popular game, continues to be the most downloaded mobile game globally in 2023.

February 2024 saw the game hit a peak daily active user of 100 million and Li is confident that Free Fire can see double-digit year on year growth in both its user base and bookings for this year.

What investors may not like about Sea Limited’s earnings

#1 - Digital entertainment continues to see quarterly paying user attrition

Garena’s most profitable division, Digital Entertainment (DE) under the Garena brand, continued to see its quarterly paying users (QPU) decline.

For 4Q 2023, quarterly active users (QAU) enjoyed a near-9% year-on-year increase although this number was a slight 2.8% dip from the previous quarter.

Garena’s quarterly paying users ratio, however, fell from 9% in 4Q 2022 to just 7.5% in 4Q 2023.

Multiplying the quarterly active users with the quarterly paying users ratio gives us the number of quarterly paying users, which fell by 9.3% year on year from 43.7 million to 39.7 million.

In addition, Digital Entertainment bookings also declined by 16.1% year on year to US$456.3 million.

The division continued to suffer from an erosion in operating profit.

2023’s operating profit for the DE division fell by 40.3% year on year from US$1.97 billion to US$1.18 billion.

What would Beansprout do?

Sea Limited has managed a first in the company’s history – generating profits instead of going for a “growth-at-all-cost” model.

On the bright side, SeaMoney has turned profitable and represents a promising growth driver for the future.

Shopee seems to have turned around with growth accelerating once again.

However, the company may still need to spend more on advertising and marketing to ensure its e-commerce division maintains its market share in the years ahead.

Also, we note that quarterly active users continues to decline for the Digital Entertainment division although Forrest Li seems optimistic about Free Fire’s potential.

Overall, it seems like the worst seems to be over for Sea Limited for now, and we will be looking out for whether the company can continue to grow while staying profitable. 

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